Chapter 20 Flashcards by Laura O'Neall

Pam’s building has 4 apartments with a market value of $500/ month. One apartment is vacant. The laundry machines make $1000/ year. What is the potential gross income?

$24,000

4 apts x $500 x 12 months
vacancy + laundry = irrelevant

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What is the maximum rental income a building would make if all units were rented at full market value with no vacancy and no collection loss?

Potential Gross Income

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What is potential gross income?

The maximum rental income a building would make if all units were rented at full market value with no vacancy and no collection loss

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What is HO4?

Home Owner’s Insurance-> Renter’s Insurance

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What does the Office of Receiver of Tax do?

Collect tax

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What is not necessary for a contract?
a- capacity
b- competence
c- agreement
d- written form

D. Written

Capacity refers to the legal age (18+); Competence refers to being of sound mind; An agreement is a contract.

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Do contracts have to be written?

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What is the most liquid?
a- real estate
b- stocks
c- art
d- cars

B. Stocks (easily liquified)

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What does OPM mean and what does it stand for?

Other People’s Money; Leverage

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What is a document predicting future financial performance of a building?

Pro forma

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What is pro forma?

A document predicting future financial performance of a building

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What is a planning tool for buildings future performance?

Pro forma

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What document would a buyer prepare to predict a build’s finances?

Pro form

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What is:

Potential Gross Income
- Vacancy & collection loss
+ Other non-rental income (laundry, etc)?

Effective Gross Income

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What is effective gross income?

Potential Gross Income - Vacancy & Collection Loss + Other non-rental Income

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What is:

Effective Gross Income

Expenses:
- Real Estate tax
- Insurance
- Payroll
- Utilities
- Reserve fund
- Management fee
- etc?

Net Operating Income

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What is Net Operating Income?

Effective gross income - expenses (fixed & variable)

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What does NOI stand for?

Net Operating Income

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What is the difference between fixed and variable expenses in relation to the operating statement?

Fixed include things that do not change (real estate tax, insurance) vs variables, which do change (payroll, utilities, reserve fund, management fees, etc)

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What is the Operating Statement?

A document which shows the Potential Gross Income, Vacancies & Collection Losses, Non-rentable Income -> Effective Gross Income, Fixed & Variable Expenses –> Net Operating Income

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Sam’s building has $7500/ month income and $45,000/ year expenses. Pam will buy it if she can get 12% rate of return. How much should Pam pay?

$375,000

$7500 x 12 months= 90,000 Effective Gross Income

90,000 - 45,000 Expenses= $45,000 NOI

$45,000 / 12%= 375,000

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A building sold for $600,000 at 12% rate of return. What was the income?

$72,000

$600,000 x 12%

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What is IRV and what are the 3 methods to determine it?

Interest = Rate x Value
Rate= Interest/ Value
Value= Interest/Rate

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What are expenses that are the same regardless if the building is full or empty?

Fixed

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What expenses depend on occupancy? For instance the water bill will change.

Variable

What is the reserve fund?

Rainy day fund set aside by manager in the event of an emergency. Usually 5% of effective gross income Often required by a bank If representing a buyer, buyer's lawyer will prefer to see this to protect the client

What is a fund set aside in the event of an emergency, often 5% of the effective gross income?

Reserve fund

What is typically paid flat fee or percentage based off gross income and treated like an expense?

Manager fee

What is the most important number for a building that people will often ask for over the price of the building?

NOI

What is the potential gross income - vacancy & collection loss + other non-rental income?

effective gross income

How is NOI determined?

Effective Gross Income - Expenses = NOI

I/R=V stands for?

(Dollar amount of income) / (Rate of Return)= (Dollar amount of value)

With IRV, what is factual and what is an opinion?

Income is a fact based upon tax returns | Rate of Return + Value are opinions

What are the 3 documents to send to potential commercial investors?

- Operating Statement - Rent Roll - Pro Forma

When do you use IRV?

To determine the value of a building

What is Capitalization Rate? (Cap Rate)

Rate of return investors are getting in a certain market for a certain product (Market rate of return as a whole. Consider the example of someone's sneakers- you know they are more than $2 but less $20,000) Market -> Capitalization

What is the rate of return investors are getting in a certain market for a certain product?

``` Capitalization Rate (Cap Rate) Market -> Cap Rate ```

What are some good ways to develop market knowledge to help determine Cap Rate?

- Real Deal, WSJ, 1010 wins | - Ask peers, broker students, etc.

What is a factor not covered by NOI and why?

Mortgage Debt Service. It is personal and not universal.

How do you determine "Before Tax Cash Flow"?

NOI - mortgage debt service= Before Tax Cash Flow

How do you determine "Final Cash Flow Income"

Before Tax Cash Flow (NOI- mortgage debt service)= Final Cash Flow Income

What are 2 factors that determine mortgage debt service?

principal and interest

Sam wants to buy a building for $2,000,000. Income is $15,000/ month. Down payment is $500,000. If Sam buys it, what is his cash-on-cash return?

36% $15,000 x 12 months= 180,000 $180,000/ $500,000 down payment= 36% (2 mil irrelevant)

How do you determine Cash-on-Cash return?

Income / Down Payment= Cash on Cash Return

What is Income/ Down Payment?

Cash-on Cash Return

Between interest and principal, which one goes up and which one goes down?

``` Interest= down Principal= up ```

Mortgage balance is $150,000 at 6% interest. What is this month's dollar amount of interest?

$750 ($150,000 x 6%)/ 12 months= $750

What is a decrease in value?

Depreciation

What are the two types of Depreciation?

Economic | Tax

What is "depreciation"?

A decrease in value

What are the 3 reasons for Economic Depreciation?

Physical Functional Obsolescence External Obsolescence

What is called when something works but doesn't meet modern standards by being either old or inappropriate, and what is an example?

Functionally Obsolete/ Functional Obsolescence Old elevators

If the air-conditioner works but doesn't meet modern tenant standards, what is it called?

Functionally Obsolete/ Functional Obsolescence

What does it mean when something is inappropriately functionally obsolete?

It is not appropriate for the neighborhood (opened a palace in a poor neighborhood would cause the real estate to lose value - the property would be more valuable in the Hamptons)

What is it called when something is inappropriate outside of the building?

External Obsolescence

What is an example of a tax shelter?

Depreciation allowance

How long does the government attribute a life span for both an apartment and a commercial property?

27.5 years; 39 years

What is depreciation allowance an example of?

Tax Shelter

What is the amount the landlord can annually deduct of the building's value from the building's income?

1/27.5th or 3.636%

What are two things that cannot depreciate?

Land | Non-income real estate

If a building's value is 1 million dollars, what is the tax deduction, and does this deduction value change over time?

$36,360 | No; if you bought it for $1 million value will always be $1 million regarding the tax deduction.

A property is worth $200,000 of which $30,000 is land. It has 10 apartments renting for $580/ month. What is the annual depreciation deduction?

$6182. $200,000- $30,000 land value= $170,000 for building APT= 27.5 years $170,000 / 27.5 = $6182 OR 3.636% x $170,000=$6182 Amount of apts & rent/month irrelevant bc it asked for deduction not income nor tax

Chapter 20 Flashcards

(62 cards)